The Role of China in the Globalization and Its Impact on Europe S Models

A Presentation to the 12th Arrabida Meeting

18 May 2006

Globalization, Role of China and Impacton Social Models

Jianxiong Zhang

Senior Researcher and Professor

Institute of European Studies

ChineseAcademy of Social Sciences

INTRODUCTION

From the perspective of economists, globalization is an optimization process of resource allocation beyond boundaries of nation-states. Driven by the market forces, multi-national corporations regulate their production, so as to have their products be manufactured in various places allover the world where comparative advantages are available for the production. The activities of MNCs is aimed to minimize the costs and maximize the profits. Globalization greatly increases flows of productive factors among nation-states, which is reflected by the expansion of international trade in general, and that of processed products or semi-manufactured goods in particular. Another consequence of globalization is great leap of international capital flows. Globalization is characterized by higher growth of global trade than that of global GDP, and even higher growth of global capital flows than that of global trade. Developed IT technology and liberalizations of investment and trade provide preconditions for the contemporary globalization.

Globalization extends the optimization of resources allocation from single economies to the whole world, markedly raising the economic efficiency within the world. FDI brings about more profits to FDI exporting countries while more employment chances to FDI importing ones. All in all, globalization brings about significant benefits to all economies involved and raises the interdependency between them. Through globalization industrialized economies can make the best use of cheaper workforces, more natural resources, and enjoy larger markets, while developing economies obtain funds, technology and advanced management skills required for their development, as well as opportunities of employment and trade.

Globalization is a double-edged sword, however. Despite the positive results mentioned above, globalization also leads to some negative subsequences. Firstly, with the liberalization of trade and investment, activities of MNCs, which are driven by the market forces, have been, to some extent, beyond the manageable extent of the national governments. Modern IT technology represented by internet highly raises the speed of capital flows internationally. A sum of funds as huge as billions of dollars can transfer from the western hemisphere to eastern hemisphere in few minutes, vice versa. This, coupled with financial speculations, arouses shuttle of a couple of trillion USD throughout the world per day. This magnifies risks over the world economy, while exploring the comparative advantages in various countries. Some failure in decision-making in individual countries or localities may give rise to a financial crisis and fast spread uncontrollably to other economies or the whole region, and even impacts negatively the whole world, as exemplified by the financial crisis in Asia around 1998.

Secondly, countries allover the world involve in globalization in different depths, as a result, the benefits they share from the process differ one from another. The top 500 giants play the leading role in globalization, therefore this process is largely a movement between the triad. North America, West Europe and Japan are the biggest gainers. Other industrialized countries second to them, while most developing countries gain relatively less. Some poorest countries are partly or completely marginalized.

Thirdly, as the marketization throughout the world, globalization would create various disparities. Nowadays, not only WTO ministerial meetings, but also G-8 and EU Summits would come up against large-scaled demonstrations and protests by opponents of globalization. The demonstrators come from both industrialized and developing countries. The former oppose globalization for loss of their jobs, because the process tends to bring about capital outflows from higher income economies to lower income ones (and labour force tends to flow from lower income to higher income economies in the case of the EU in the meantime, which is one of the reasons why the first EU constitution treaty was rejected). The latter accuse globalization of worsening the environment and depleting natural resources of their countries. And, they complain that the lion share of benefits brought about by globalization go to industrialized countries, with themselves being exploited.

CHINA IN GLOBALISATION

It should be noted that quite a number of developing economies, especially those are taking off, significantly benefit from this process. American corporations take up a lion share in number among the top 500, European and Japanese ones second to them. Some Chinese corporations were once insignificantly found in the list, but its mere share in the list declined in recent years. Due to its abundant human resource and huge markets, however, China becomes a major destination of FDI and an important market for MNCs. In this sense, China is also an actor in globalization, but it is just a passive one. Nevertheless, the benefits gained from and contributionsmade to globalization by China arestill significant.

Since the economic reform and opening which started in 1978, China strengthened its connection with the rest of the world, which firstly reflected in the growth pace of its foreign trade. In 1978, China’s total foreign trade flows registered only US$20.64 billion, which included US$10.89 billion of import and US$9.75 billion of export, with US$1.14 billion deficit. In 2005, however, the total foreign trade value of China reached US$1422.12 billion, with an export flow of US$762.0 billion and import flow of US$660.12 billion, and registered a surplus of US$101.9 billion.[1]

Figure 1 Growth of China’s Foreign Trade (1978-2005)

Source: developed based on data from the Ministry of Commerce of PRC (MOFTEC).

In 2005, China’s export, import, and total foreign trade values both ranked the 3rd in the world, remaining the slot in 2004. The shares of it in the world’s totals, however, rose from 6.5 percent to 7.3 percent for export and from 5.9 percent to 6.1 percent for import in the same period.[2]

The export of service trade of China registered US$81.2 billion in 2005, ranking the 8th in the world, and import of service trade reached US$85.3 billion in the same year, ranking the 7th in the world, both having climbed over one slot compared with the previous year. China’s export of service trade takes up 3.4 percent and import of service trade 3.6 percent of the world’s totals, with a deficit of US$4.1 billion.[3]

Figure 2 Share of Export of China in Leading Economies

Source: developed based on WTO website.

Figure 3Share of Import of China in Leading Economies

Source: developed based on WTO website.

China’s trade of goods has grown at a fast rate in general since 1978, but relatively fluctuant from year to year. The annual growth rate exceeded 30 percent in 1978, 1979 and 2000, while registered minus rates in 1982 and 1998. Nevertheless, the average rate in the period from 1978 to 2005 exceeds 20 percent.

The depth of China’s involvement in globalization is also reflected in FDI scale it absorbs. From the early 1980s till the end of November 2005, Chinese Government approved the establishment of 548620 foreign funded enterprises altogether, with US$1263.82 of contracted investment, of which US$615.23 billion have been used. China is the largest destination of FDI other than the United States in the world, and the largest destination of FDI in the developing world. In 2004, China made use of US$60.63 billion, which took up 10 percent of the total FDI made throughout the world in that year. [4]

With the advantages in advanced technology and management, as well as close connection with the world market, foreign funded enterprises play the role of leading exporters and foreign exchange makers. In 2004, foreign-funded enterprises produced 40.9 percent of the total export value of China, making a substantial contribution to the integration of China into the world economy.

Since it carried out the reform and openness in 1979, China’s economy has gained a big impetus. The market-oriented reform activated the economy by getting rid of the defects of planned economy. This process was experimental and went through more than a decade before its goal model was finalized. The reform, coupled with the opening, brings about a high economic growth in the country. Since the early 1980s, China’s economy has grown at an average rate of 9.2 percent annually in real terms. [5]

Table 1 Top Ten Economies in the World (Bn. USD)

Note: The USSR excl. At current exchange rates.

Source: OECD statistics.

The table 1 reflects the changes of China’s rank among the leading economies in the world by 2003. In 2005 China’s economic growth rate reached 9.9 percent, with a total GDP of US$2225.7 billion.[6] The exact rank of China in the world in terms of GDP of that year is not yet clear, as the statistics of Germany, France and UKof 2005 were not available by the time this paper was drafted. It is believed that China has been the fifth largest economy in the world, having surpassed France and Italy. And, it is expected to surpass UK in 2006, if it turns out still lagging behind that economy in 2005. The share of China in total GDP of the world should be 4 or 5 percent now.

In the late 1970s when the reform and openness policies just began, the Chinese Government vowed to double the per capita income of its people, to US$800, before the new century. This target was achieved ahead of schedule in 1997. Since the reform and opening, the living standard of Chinese people has drastically changed. Let me to illustrate the changes with the number of cars in use in the country, rather than boring tables.

In the early years of the reform, TV sets and refrigerators were once luxury goods, and there were hardly private cars in China. Nowadays, automobiles in use in the country have hit 34 million in number and continually increase at a rate of 5.75 million each year in the country. Of the total number, 14 million are cars privately owned. The 1990s is the period when the number of China’s automobiles boosted the fastest. For example, there were merely 300 thousand automobiles registered in Beijing in 1993. By the end of 2005, however, the figure has reached 3 million. A half of them are privately owned. [7]

PROSPECT OF CHINA’S ECONOMY

In the past quarter of century, China economy led the world in terms of growth rate, gave rise to a miracle of long-term growth. Since the “miracle” of high-rate economic growths in Japan and Korea maintained for just about 25 years, quite a number of international observers predicted that the growth of China would slow down in the first decade of the 21st century.

Most Chinese economists hold a different approach. The performance of China’s economy shows that the on-going growth momentum is still strong, and this trend is believed to persist for another quarter of century. I personally have two arguments.

Firstly, the growth in Chinais an extensive one so far, which is characterized by increase of products’ quantity. This is a typical feature of developing economies. On the contrary, growths in industrialize economies are normally intensive ones, which are characterized by enhancement in qualities of products and service. China’s economic size expands rapidly in total value terms indeed, but, due to its huge population, a quite large portion of its people are not able yet to enjoy modern life style.

Again, let’s take the figure of automobiles in use for example. China’s automobiles boost rapidly in total number terms, but in per capita terms the figure is totally different. Say, there are 55 automobiles per one hundred people in the United States, 54 inGermany, and 12 even in the South Africa, while in China, this figure is only 0.8 by now. [8]This suggests that in the coming quarter of century China’s growth will largely aim to meet the needs of the population for basic necessities. The huge potential demands in home market will underpin a long-term growth in the country.

Secondly, the economic disparity geographically is still highly visible, with east coastal and central regions relatively developed and west regions backward economically. For example, for some years GuangdongProvince alone produced 40 percent of China’s export while some west province or autonomous regions made little contribution to that of the country. The geographically economic disparity allows a big roomage for continual high-speed growth for the country in the future.

For the above reasons, China’s economy is expected to continue its growth at a rate above 7 percent for another quarter of century.

In this moment, China is still a poor country, with a per capita GDP of mere US$1700, lower than that of more than 100 countries in the world. There are still 23 million people living below the poverty line in the country.[9] If in the light of the international standard, people live on less than US$2 may exceed 100 million. To have China catch up with advanced industrialized countries in terms of people’s living standard needs at least four decades.

CHINA AND LEADING TRADING PARTNERS

Globalization reinforces the integration of China into world economy, tightening the ties of China with the rest of the world, among which those with leading economic bodies, such as the European Union, the United States, Japan and Hong Kong, as well as ASEAN, are particularly prominent. The bilateral trade flows of China with the EU, USA and Japan combined account for 45 percent of China’s total foreign trade value. [10]

Since 2003, the EU has become the first largest trading partner, while China becomes the second largest trading partner of the EU. The bilateral trade flows takes up 15 percent of China’s totals, and 5 percent of the EU’s external trade. And, to make the EU become the top trading partner is one of goals of the comprehensive strategic partnership between the two bodies. The two parties all benefit greatly from the deepening of the bilateral partnership.[11]

The United States is the second largest trading partner of China, while China is the third largest trading partner of the power. The bilateral trade value accounts for about 15 percent of China’s total and about 5 percent of the US’s total.[12]

Table 2 Top Ten Trading Partners of China (2004)

Source: MOFTEC statistics.

Since 2001, China has become a member of WTO. For the WTO entry, China carried out fifteen-year tough negotiations with its leading trading partners. This is also a process that China made efforts to fulfill the requirements of WTO membership and to adapt itself to the global trade system. Since 2001, China has amended 2500 laws or regulations, abolished some 800 laws, to accord the practice within WTO. In addition, it substantially readjusted its policies in tariff, financial service, and government procurement. [13]

From early 2001 to 2005, the import tariffs were cut to an average of 9.4 percent from 15.3 percent for general goods, while that for IT products, including computers and telecommunications gear, has fallen to zero from 13.3 percent. In the meantime, the import tariffs for farm products were decreased to 15.3 percent from 54 percent during the same period of time, and are to continually decline to 15.2 percent in 2006.[14] Such a sharp reduction in import tariff of farm products is without precedent in WTO history. It is extra-significant since the average import tariff of farm products globally is still as high as 62 percent now. Although agriculture produces only 15 percent of the GDP, it employs 65 percent of the workforce in the country.

Chinapromised to open its financial markets and grant national treatment to foreign banks in 5 years after its entry in WTO. It is actively fulfilling this promise. Since December 2004, foreign banks have been in a position to run Chinese currency operation in 18 Chinese cities.

China took part in talks on joining the WTO Government Procurement Agreement in the second half of 2005. When the agreement is fully reached, it will grant foreign companies with nondiscriminatory access to government purchases.

TRADE DISPUTES

Globalization is a deepening process of international division of labour. It necessarily requires readjustment of economic structures in countries involved. In a certain period and to some extent, the changes would give rise to huge crashes and even pains to the societies concerned. The pains are also reflected by rapidly increasing disputes between trading partners. This is because the expansion of trade flows increases the probability of friction in interests between trading partners. It is understandable that national governments are under an obligation to make every effort to minimize negative effects to their populations brought about by the frictions.

The integration of China into the global economy characterized by the accession of it into WTO forces the country to readjust itself and change its own social and economic models, and in the meantime it also impacts on the rest of the world, including pushing readjustment of the economic structures and social models in the EU and USA.

The tough negotiations on China’s WTO accession as long as 15 years suggest that both China and its counterparts fully foresee the possible crashes of the event on them. At certain stages of the WTO entry negotiations, a major sticking point was China’s insistence that it should be treated as a developing country. Prior to the Uruguay Round, this status was meaningful. The then trade rules permitted “special and differential treatment” for developing countries, although the Uruguay Round reduced most differential treatment to the timing of implementation of obligations afterward. In the context of accession to the WTO, China was forced to agree to shorter phase-in periods and lower caps on certain exports than those granted to many other low-income countries.